Construction Loans Defined
Construction Loans are defined as any nature of funding or monies offered to an individual for the purpose of undertaking construction projects, which may include creation, renovation, modification, or the destruction of a structure; Construction Loans substantiate the lack of sufficient possessions, assets, or monies with regard to the borrower that are required to furnish the construction project. Akin to the institution of traditional loans, 2 primary parties typically exist within the Construction Loans process:
The Standards and Practices of Construction Loans
The party named as the ‘lender’ within Construction Loans provides an individual, known as the ‘borrower’ with any object of value in order to establish both the terms latent within individual Construction Loans the conditions, as well as stipulation mandating the repayment of those individual Construction Loans. Construction Loans that are approved subsequent to their respective application must be utilized for the expressed purposed of construction efforts; the misuse of monies rendered from Construction Loans is subject to criminal prosecution
Construction Loans and Cost Ratios
Within the approval process of applications submitted for potential Construction Loans are parameters and protocols undertaken in which the financial analysis of potential borrowers takes place; the result of this type of investigation will typically contribute the final decision with regard to the approval of Construction Loans:
Loan to Value Ratio
Construction Loans to Value ratios are classified as the amount of money allowed with regard to the gross cost of the construction project; Construction Loans to value ratios considered as the most attractive range between 60% and 90% – in the event that a construction project will cost $1M and the lender receives a loan for $900k, the Construction Loan to Value ratio is 90%
Loan to Profit Ratio
Construction Loans to profit ratios depict the expected profit with regard to the cost of the construction project; Construction Loans to profit ratios exceeding 20% are considered to be the most attractive – in the event that the cost of the final construction project is estimated to be $1M, the profit rendered from the project must exceed $200k resulting in a 20% contraction load to profit ratio
Terms of Construction Loans
The following are amongst the most common components inherent within contractual Construction Loans:
Terms of Construction Loans
The terms expressed within Construction Loans are largely determined in accordance with the financial history presented by the applicant; applicants with stronger financial history, higher income, and the absence of debt will be more eligible for attractive rates applicable to Construction Loans, as they will be deemed as less of a risk for default.
Construction Loans and Interest
Interest attributed to Construction Loans is defined as an expressed – and established – percentage of the gross value of Construction Loans added to the full repayment amount required for the satisfaction of Construction Loans; interest can be accrued in a variety of methods, including the duration of repayment, as well as the initial, gross value of the loan in question.
Contractual Construction Loans
The classification of Construction Loans in which the gross amount of outstanding monies, assets, or valued owed outweighs the gross value of assets, income, or monies in possession of that individual range with regard to their inherent risk. As a result, the debt is incurred as a result of the failure to satisfy the repayment of Construction Loans is considered to be in direct violation of the pre-agreed conditions expressed within the terms of the contractual agreements.